Department of Justice OKs West Penn takeover

April 11, 2012 5:15 PM

By Rich Lord Pittsburgh Post-Gazette

The proposed takeover by Highmark of West Penn Allegheny Health System got the U.S. Department of Justice's approval Tuesday, clearing one of the major obstacles to the proposed insurer/provider merger.

The Justice Department's Antitrust Division gave its thumbs up a week before a hearing at which the state Department of Insurance will hear testimony on the merger. The insurance department's review is considered the highest hurdle to Highmark's takeover of West Penn, which will include a $475 million infusion.

Highmark pronounced itself pleased with the news out of Washington, D.C.

Meanwhile, UPMC, which has said it will not renew its contract with Highmark because of the insurer's merger with its rival hospital system, issued a statement saying it agreed with the Justice Department that competition has been enhanced in the health insurance market, which "will allow consumers to enjoy the benefits of more choice."

The Justice Department's role was to investigate whether a Highmark-West Penn merger would lessen competition. Because Highmark is almost exclusively an insurer and West Penn is a health care system, their marriage won't stifle competition in either area, the department said in a press release.

"The proposed affiliation holds the promise of bringing increased competition to Western Pennsylvania's health care markets by providing [West Penn] with a significant infusion of capital and increases the incentives of market participants to compete vigorously," the department's statement said.

"The hospital market in the Pittsburgh region is highly concentrated," it continued, and so is the insurance market. The department found that Highmark and UPMC control roughly 60 percent of the health insurance and health care markets, respectively.

It noted that even as Highmark is propping up UPMC's health care competition, UPMC has successfully attracted insurers who are now vying with Highmark. The department seemed to see some competitive benefits in the failure -- so far -- of UPMC and Highmark to renew their prior contractual relationship.

"Long-term contracts between dominant hospitals and insurers can dull their incentives to compete, leading to higher prices and fewer services," the department wrote.

In a statement, Highmark said it welcomes competition.

"Highmark looks forward to full competition among health insurers and providers in the Western Pennsylvania health care marketplace."

The insurer reiterated its hope that "a five-year contract with UPMC and regulatory approval of the affiliation with WPAHS will achieve the type of competition among health care providers and insurers that the Justice Department has described."

UPMC continued to tout a future environment with no contract between the two.

"As the long-term contract between UPMC and Highmark expires, the two organizations need to work together to ensure a smooth transition into this newly competitive environment," UPMC's statement said.

In a thinly veiled swipe at UPMC, Highmark wrote that a failure of the planned merger with West Penn would mean that "a single, dominant system will continue to obtain unreasonable payment increases from all private health insurance companies, which this region can ill afford."

In 2008, Highmark won approval from the Justice Department for a proposed merger with Independence Blue Cross, but the state Department of Insurance nixed the deal.

This time around, Highmark said it seeks "prompt" approval from the state.

The insurance department will hold a hearing from 9 a.m. to 5 p.m. on Tuesday at the Westin Hotel at the Convention Center, Downtown. After a break, the hearing is scheduled to continue at 7 p.m.

In a press release, the insurance department said it "has asked almost 200 follow-up questions on the proposal and has engaged a team of legal experts, economists and investment bankers."

The department is charged with deciding whether the merger will lessen competition, improve efficiency, hurt the insurance-buying public or compromise Highmark's solvency, competence, experience and integrity.